Chapter 1 Flashcards
What are the general-purpose financial statements?
Balance sheet, income statement, statement of cash flows, statement of stockholders’ equity. Provide the most useful info as possible at the least cost.
Objective of financial reporting
to provide financial info about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors.
Entity Perspective
companies are viewed as separate and distinct from their owners
Decision-usefulness
provides info that is useful for making decisions
accrual-basis accounting
a company records events that change its financial statements in the period in which the events occur
Parties involved in standard-setting
- Securities and Exchange Commission (SEC)
- American Institute of CPAs (AICPA)
- Financial Accounting Standards Board (FASB)
SEC
Public companies send their financial statements and must adhere to GAAP; It is the enforcer.
AICPA
American Institute of CPAs
Committee of Accounting Procedure
created in 1939 by AICPA (at SEC urging); composed of CPAs; issued 51 Accounting Research Bulletins during 1939 - 1959.
Accounting Principles Board
created by AICPA in 1959. Purposes: 1. advance the written expression of accting principles. 2. determine appropriate practices. 3. narrow the areas of difference and inconsistency in practice
APB Opinions
Accting Principles Board pronouncements from 1959 - 1973.
Wheat Committee
appointed by accting profession leaders in 1971. Created Financial Accting Foundation, Financial Accounting Standards Board, and Financial Accting Standards Advisory Council
Financial Accting Foundation
Selects members of FASB and Advisory Council, funds their activities, and generally oversees activities.
FASB
establish and improve standards of financial accting and reporting for the guidance and education of the public
Differences between FASB and APB
Smaller membership full-time, remunerated membership greater autonomy increased independence broader representation
Financial Accounting Standards Advisory Council
consults on major policy issues, technical issues, project priorites and selection and organization of task forces
FASB Standards Statment
requires the support of 4/7 board members; considered GAAP once passed.
Due Process System
how standards are set; 1. topic ID’d; 2. R&A; 3. public hearing; 4. board evaluates and issues draft; 5. board evaluates responses and issues final draft
Types of Pronouncements
- Standards, Interpretations, and Staff Positions
- Financial Accounting Concepts
- Emerging issues Task Force Statements
Standards, Interpretations, and Staff positions
interpretations - modify or extend existing standards;
staff positions - provide interpretive guidance and also minor amendments to standards and interpretations
Statements of Financial Accting Concepts
fundamental concepts used by the board to develop future standards (does not establish GAAP)
Emerging Issues Task Force
people from every aspect (CPA firms, preparers, SEC, etc.); task force purpose is to reach a consensus on how to account for new and unusual financial transactions that may potentially create differing financial reporting practices
Sarbanes-Oxley Act
increases the resources for the SEC to combat fraud and curb poor reporting practices; introduces sweeping chages to the institutional structure of the accounting profession;
- Established Public Company Accting Oversight Board (PCAOB). has oversight and enforcement authority and establishes auditing, quality control, and independence standards and rules
- Implements stronger independence rules for auditors
- Requires CEO’s and CFOs to personally certify fin statements (forfeit bonuses & profits when there is an accting restatement)
- requires audit committees to be comprised of independent member and members with financial expertise
- Requires code of ethics for senior financial officers
